IMF loan to ease Forex woes in Papua New Guinea

A zero-interest rate loan of US$363.6 million made by the International Monetary Fund (IMF) under the Rapid Credit Facility (RCF) to the Government of Papua New Guinea is intended to relieve a struggling Forex market and other areas affected by the COVID -19 pandemic. Since the completion of the construction phase of a multi-billion-kina Liquified Natural Gas project known as the PNGLNG Project in 2014, businesses have faced a severe shortage of forex forcing the Bank of Papua New Guinea to ration the limited amount available.

The forex shortage has tended to be cyclical with intermittent interventions from the Government having proved unsustainable over the years.

The IMF loan will help to ameliorate this with two major mining and petroleum projects expected to help with the forex shortage and the depressed state of the PNG economy. The investment agreements are due to be sanctioned if possible before the end of this year.

The loan was approved by the IMF Executive Board on June 10th, 2020 as emergency funding to help Papua New Guinea to address urgent balance of payments needs and to provide resources to the authorities to maintain macroeconomic stability.

To address the pandemic and to assist the private sector, the Government of Papua New Guinea has taken measures to support businesses, workers, and households to safeguard the health and livelihoods of the population.

An elated Papua New Guinea Treasury Minister, Ian Ling-Stuckey, told the PNG parliament last week that this IMF loan was a far better option than other budget support arrangements previously negotiated by the Papua New Guinea Government.

An IMF statement said the crisis had erupted as the government was beginning to implement wide-ranging reforms under a Staff-Monitored Program (SMP)*.

The authorities have acted forcefully to prevent a significant outbreak of the COVID-19 virus. While these efforts have been successful to date, the economic impact of mitigation measures and export losses is likely to lead to negative growth in 2020 and has generated significant fiscal and balance of payments financing needs.

Lower resource export earnings have led to a large balance of payments shortfall of around 4% of GDP, while measures to contain the spread of the virus are dampening economic activity and government revenues, leading to a substantial widening of the budget deficit to over 6% of GDP,” the statement said.

The IMF funding relief is part of the PNG Government’s stimulus package of US$1.36 billion to support the 2020 budget announced in April by the Treasury Minister.

Following Executive Board discussions, Mr. Tao Zhang, Deputy Managing Director and Acting Chair said: “Papua New Guinea is facing headwinds at a time when its economy is already fragile and has limited fiscal space.

IMF support, through the RCF, will help meet immediate financing needs and should catalyze financial support from development partners,” Mr. Zhang added.

“The authorities have taken quick action and implemented measures to prevent the transmission and spread of the coronavirus. They have also taken a series of policy measures, including fiscal and financial measures, to support activity and incomes, despite a substantial fall in government revenues. With very limited fiscal space, measures have focused mainly on redirecting spending toward key services including healthcare, easing access to private savings, and avoiding a credit crunch.

Assistance from development partners is needed to close the balance of payments gap and to help address the fiscal shortfall. To strengthen confidence in their commitment to the appropriate use of financial support, the authorities have taken strong steps to increase transparency and accountability for COVID-related spending. They have also taken action to implement key structural benchmark measures in the Staff-Monitored Program to underscore their ongoing commitment to the reforms embodied in that program.” he added.

The IMF help compliment efforts by development partners to help whether COVID-19 induced difficult economic times for fragile markets across the Pacific.

* SMP is an informal agreement between country authorities and Fund staff to monitor the implementation of the authorities' economic program. SMPs do not entail financial assistance or endorsement by the IMF Executive Board